Good day, ladies and gentlemen, and welcome to the Ingersoll Rand Second Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Zac Nagle, Vice President of Investor Relations. Please go ahead.

Thanks, and good morning, everyone. This is Zac Nagle, and it's a pleasure to join you for my first Ingersoll Rand earnings call as Vice President of Investor Relations. Welcome to Ingersoll Rand's Second Quarter 2016 Earnings Conference Call. We released earnings this morning at 6:30 a.m., and the release is posted on our website. This call is also being webcast and archived on our website at ingersollrand.com, where you'll find the presentation accompanying our comments this morning. Please go to Slide 2. Statements made in today's call that are not historical facts are considered forward-looking statements and are made pursuant to the safe harbor provisions of federal securities law. Please see our SEC filings for a description of some of the factors that may cause actual results to differ materially from anticipated results. The presentation also includes non-GAAP measures, which are explained in the financial tables attached to our news release. The participants on this morning's call are: Mike Lamach, Chairman and CEO; Sue Carter, Senior Vice President and CFO; and Joe Fimbianti, Director of Investor Relations. With that, please go to Slide 3 and I'll turn the call over to Mike.

Great. Thank you, Zac, an official welcome to Ingersoll Rand and your first earnings call with us. As you can see from our earnings release this morning, we had another excellent quarter. We had outstanding execution across the company delivering 15% EPS growth, record operating margin, share gains and strong cash flow despite challenging industrial markets. We're seeing strong momentum in the operating system that we've been installing and developing in the company over the past 6-plus years. As we did last quarter, I'd like to start out spending a few minutes linking this quarter's performance to the longer-term strategic direction of the company to help investors understand how we're building a more valuable, sustainable and less cyclical company over the longer term. Within our operating system, operational excellence and growth excellence have been cornerstones of the strategy from the beginning, with our goal of becoming the very best operating company within our diversified or multi-industry peer group. This quarter we continued to deliver best-in-class operating leverage of 47% and our goal is to achieve top quartile organic growth for the quarter and for the year as well. There were a number of noteworthy milestones that showed clear progress in these areas during the quarter. Our residential HVAC business had another outstanding quarter with record revenue and profitability. We estimate that over the past quarter and 12 months, we now have benchmark profitability in this business and are seeing the benefits of a 5-year effort to refresh the product line, align and reposition the channel and dramatically improve product management, manufacturing and supply chain. Our residential business is also a model for the deployment of product growth teams for delivering market share and margin growth. Our commercial HVAC business in North America had record second quarter bookings and revenue. Similar…

Thank you, Mike. Let's go to Slide 4. This is a summary slide that I like to begin with and give you some takeaway from today's call. As Mike has discussed, Q2 was another strong operational quarter for us and it shows through the financial results that we posted. In the second quarter, we drove year-over-year organic revenues higher by 3%, adjusted margins up 80 basis points with a leverage of over 45% and adjusted earnings per share up 15% against the backdrop of a very slow-growth environment and particularly challenged industrial markets. Adjusted earnings per share of $1.38 exceeded our guidance range of $1.27 to $1.32 by $0.08 at the midpoint and $0.06 at the high end. Our $0.08 beat versus our midpoint was driven by exceptionally strong performance in our Climate segment, partially offset by challenged markets in our Industrial segment and about a $0.06 beat from a lower tax rate in the quarter. And as I'll discuss in detail later, we believe we'll maintain a 200 basis point lower average tax rate than our previous guidance of 24% to 25% for 2016. We also posted strong year-to-date free cash flow of $348 million, up $293 million from the prior year. We're seeing the benefits of our focus on working capital management and our business operating system and our rate -- and with that, we're raising our free cash flow forecast to $1 billion to $1.1 billion, excluding the proceeds from the sale of Hussmann. Let's turn to segment results. The Climate segment continues to exceed expectations, driven largely by outstanding execution in both commercial and residential HVAC with mid-single-digit growth and high single-digit growth, respectively. Margins also showed healthy expansion, driven by strong volume, productivity improvements and material deflation of nonferrous commodities. We also continued to invest…

Okay. Great. Thank you, Sue, and let's go to Slide 17. So to conclude, we had an excellent quarter grounded in solid execution. I'm proud of the many people within Ingersoll Rand that continue to deliver for our customers and for our shareholders. I'm pleased with the progress and the momentum and the implementation of our operating system, and the growing depth and bench strength throughout the company that makes the operating systems come to life through continuous improvement. We're building a stronger, more valuable and more sustainable and less cyclical Ingersoll Rand than ever before. And it's exciting to me and leaders throughout the company to be part of that transformation and to help create a bright future with more individual development possibilities for all our people throughout the world. Results we reported this morning are a direct result of the strategic work, the persistence, the tenacity of the talented people that represent the unique culture we're building. It is a strategic advantage and it's the toughest thing in any business for a competitor to copy. There are a few takeaways I want to point out to you as we head to the back half of the year and into 2017. First, the Industrial businesses are running effectively in a very tough market environment. The management team is aggressively taking and will continue to take the right actions to reduce the overall cost structure of the business. And it's committed to protecting the key product and service investments that will build long-term growth and margin expansion when the markets improve. Second, the transport market is performing as we expected. And as we said at the beginning of the year, we expect the first half results to be up and the back half of the year would be down. The management team has done an effective job anticipating and seeing around the corners and is proactively taking the actions to ensure strong margin performance continues. Third, commodity deflation has been a tailwind during the first half of the year, and it's going to moderate to neutral in the back half of the year. We have a long track record of managing the price material input equation very effectively and we're going to continue to do so going forward. And finally, let me say, we are proactively reviewing both prior restructuring considerations as well as new actions as our business, markets and even the input variables into our own models continue to evolve. Although we don't have any immediate additional restructuring actions to take or announce today, we won't hesitate to take additional prudent restructuring actions going forward. So with that, Sue and I will be happy to take your questions.

[Operator Instructions] Our first question today comes from the line of Nigel Coe with Morgan Stanley.

Before I ask my question, I just wanted to clarify, Sue, did you mention the tax rate 20, 23 is now a structural tax rate going forward?

Yes, it's 22% to 23%, and that's the ongoing rate.

Okay. Great. That's very clear. Mike, obviously, very strong booking orders -- bookings for the North American commercial HVAC in North America, low teens. You mentioned a 25% number on the last call. I'm not sure we're comparing apples to apples here, but maybe just clarify that 25% as the low teens that you actually booked. And then maybe if you can just dig into the health of the light-commercial versus applied unitary markets?

Yes, Nigel, thanks for that question. Actually, I would expect 2 quarters of similar growth, 2 quarters of teens versus one 20-plus quarters. So I think that's intact. The pipeline, frankly, has never been healthier than it is right now. And it's healthy through all the institutional large project work. Commercial is maintaining some resiliency that we're seeing here. In unitary, at the light levels, still strong for us. So residential, all the way up through light commercial, still remains very strong for us across the board.

Okay. Great. So no signs of weakness there. And then just on the Climate margin outlook. You've done 13.8% in the first half of the year. The low end -- or mid- to lower end of your margin guidance for Climate would suggest basically flat margins in the second half of the year, which seems pretty bearish maybe just contextualize why you see an outlook for maybe 14% at the low end?

So Nigel, let me start out and then Mike can add his comments as we go forward. So as I think about Climate in the back half of the year, you're going to have a couple of different dynamics. The first of which, as we talked about, was that direct material was going to moderate in terms of its deflationary environment. So let me talk about that for just a second. What we expect to see in the back half of the year is we expect to see that steel, particularly in the fourth quarter, is going to turn more inflationary than deflationary. So that's part of what's happening with the flatter margins. We're also going to continue to invest in the overall business in the back half of the year. Again, we've got some significant product launches, and we see this as an area that really sets us up for success. So it's really price, a little bit of mix that comes from us lapping the 14 SEER in residential and then investment in the business.

And Nigel, I'd just say, to me, the biggest number on the page is we're putting 0.5 point -- 50 basis points of margin back into investment. And it's a formula that's worked for us. Sets us up well for 2017. And we like what we're getting out of those investments.

And our next question comes from the line of the Julian Mitchell with Crédit Suisse.

Just on the Industrial margin guide for the second half. So it looks like you're looking at a margin of maybe 11%, 11.5% in the second half. The clean margin was 10.9% in Q2. So I thought maybe there'd be a bit more coming through to support margins from productivity or cost reduction? So I just wondered why maybe there wasn't a bit more urgency around getting the cost out, as it looks as if the sort of margin decline is going to be similar second half as first half?

Yes, I'm sorry, Julian, starting I would say that again, to me, the most important thing that's happening there is they're really, say, 40% through an investment cycle there that there is just no reason to stop and go on that. And so that continues for the balance of the year for us. And that's something that I think is vitally important. There's a tremendous effort underway at reducing cost in that business. Much of what's not just visible through what you'd say would be qualified restructuring. Much of that is just reduction in place and just other containment actions being taken in the business. So that, really, when I say the business is being run effectively, I have no doubt that all the rocks are being turned over with the exception of protecting this critical investment pool that is important to us going forward. And I use that one example for you because that happened to be the example of the product growth team. It's the one product area that we have launched in that portfolio, and we're getting tremendous results with that. So again, this gives us some confidence that, although it's not a great story for the third and the fourth quarter, we're not running the company for the third and the fourth quarter. We run the company for the long run, and we hope investors see that. And that's part of the reason I think taking good success around the Climate business, keeping utilization up through the combined factory structures that we've got, leveraging the networks of that -- excellence across the compression-related businesses that we have, give us the opportunity to stay the course on these investments, and that's really important.

Very clear. And then my follow-up would just be -- you touched on the input cost impact in Q4. I think the last numbers I have on the sort of COGS split are from 2010 or '11, the last time materials were an interesting issue. Is there any update you could give on the breakdown of COGS, in terms of sort of raw materials versus processed materials and components and so forth?

Sure. So if you think about -- and what I'll do is I'll give it to you in terms of dollars. So if you think about direct material spend for the company, Julian, it's about, say, $6 million -- or $6 billion a year in direct material spend. If you then break that down into the commodities that we're talking about, it's roughly about 10% to 12% of that. And as you think about then breaking that down even further, steel is going to be the largest component with copper and aluminum following that. And so the price pressure that we're thinking about in the back half is on steel, because copper and aluminum are pretty much staying the course with what we've seen.

Our next question comes from the line of Jeffrey Sprague with Vertical Research.

Mike, just thinking kind of bigger picture here, strategically. You guys are actually doing a really solid job, operationally. And I can't help but look at Lennox at 22x earnings, and Atlas Copco at 22x earnings, and just wonder if you're actually reevaluating the portfolio? I know you went through the exercise with Allegion, and the businesses that you retain are air-oriented businesses. But do you have any thought or response to that question or that idea?

Yes, Jeff. It's a great question, and thanks for the opportunity to step back and look at it. Because I look back over the 7 years that I've been in this role, and I remember when Industrial was the sweetheart of the portfolio, right, from '09 to '11 even through '13. And we're expanding margins so fast that it afforded us the opportunity to do all the great investment we made in the Trane, res and commercial businesses, which is really why you're seeing the numbers that you're seeing today in that business. And so now it's flipped. Remember, that was all happening with no real commercial -- certainly, no institutional support coming from construction markets. And now that's flipped. And it's allowed us the opportunity to keep factories fairly loaded. It's given us the opportunity to keep technical professionals highly engaged in development of product. And all that really just -- it really sets up where at some point when the commercial market in HVAC slows down, when institutional eventually fades, our hope is that we've got a strong, refreshed, energy-efficient, reliable portfolio sitting, particularly, in compression technologies. And we're going to leverage that just like we did from '09 to '11 when it grew 7 full points. We are very leveraged here toward some of those fixed costs. Where we play in the market is in the big machine. It's not the Cameron -- I'm not talking about Cameron, I'm talking about Cameron plus. All the 250- to 400-horse centrifugal air compressors, of which we're the leader now in that area. And we don't really participate much in the vacuum and blower business, which has some growth in it. So we have a product portfolio and a position in the market in these larger machines, that's what's getting hurt right now. And we're not going to throw the baby out with the bathwater here on that, for sure. That's why in addition to I mentioned the product development, but the machining investments I mentioned in the last call and this call, those are going to continue. And we'll put $50 million in the machining in this downturn, so that when we emerge out of this thing, we're going to be more productive. The hope that it's not just 7 points of margin, it's more than 7 points of margins coming back. So Jeff, I think, I really have got my head around the value of what we've created around integrating the portfolio. And over the long run, not really so interested in a flash in the pan around some multiple for short cycle. I'm really interested in building the value of the company over the long run. And again, step back 2009, Jeff, if you invested back in 2009, you're a very happy investor. And I thank you for all the Christmas cards we get to that effect. But it's because we've had the portfolio that we've had.

Yes, I had a heroic buyback in 2009. Thanks for that perspective. Also then just on the balance sheet, Mike...

Jeff, just before we do that. Incremental margins every single year have been in the top quartile. Organic growth rates almost every single year have been on the top quartile. We've done that with elements of the portfolio firing and not firing at various points in time. And I just have to believe that there's value in that, and there's industrial logic around what we're doing around the sustainability and energy efficiency fronts of the business. So go ahead.

Yes, I know, I agree. I mean your performance has been great, and just you're not getting fully paid for it. The balance sheet, what is the plan for the year end? Sue gave us the kind of the generalized color. But with the Hussmann proceeds and the strong cash flow, would you be opportunistically looking to step in share repurchases here? I can't imagine the M&A pipeline is that active but perhaps it is.

So Jeff, let me take a shot at that, and then I'm going to let Mike jump in. But I'm going to kind of use some of the same passion that Mike had in his comments on the multiples and what we've built at Ingersoll Rand. From a perspective of our cash generation and then our ensuing capital allocation, we're really trying to create longer-term shareholder value with the cash that we're generating. And so what we've seen that has been really successful for us is investing in our products and investing in areas like energy efficiency and sustainability. Those are proven for us in terms of building our growth excellence. If we look at Operational Excellence, all of the work that we've done and invested in the company, whether it's in our factories or in our overall processes with the business operating system, all of that has shown to be something that has worked very well for us. So our preference, as we think about capital allocation and your question, is to really invest and grow the company. So to be more specific, then, in terms of what that means, it means I want to continue to invest. It means I want to continue to do all of those things. It means we want to look at the M&A pipeline. But what we have is an opportunity where we can be patient, we can wait for the right opportunity and not just take the cash that we're generating and run out and buy something. So we're really, really thinking about investments. We're thinking about M&A. Dividends are extremely important to us. We understand that. And we're going to continue to have dividends that are in line with our peer payout ratios, and we'll also be opportunistic about share repurchase. I don't want to take that completely off the table. But if I set our preference up, it's going to be to build longer-term value through investments in the business and acquisitions.

Yes, I agree, Jeff, with Sue's comments completely, obviously. But I would tell you that the competitive dividend's a given, and the fact that we're controlling dilution of the share count is a given. Just we don't want dilute shareholders through that, so that's a given. The optionality beyond that, we want to be really smart allocators of capital. And we want to have our eyes wide open on how we do that. When you get big dislocations in the share price, we want to be opportunistic, and we were in the first quarter between $48 and $51 a share. I mean, clearly, that was a good idea. And we've been opportunistic when we saw value in long-term creation through acquisitions. And so we'll continue to do that. Now all that being said, I think we have less than $1 billion in cash, so that's not a whole lot of cash we are talking about for a company our size to be walking around with.

Our next question comes from the line of Joe Ritchie with Goldman Sachs.

Welcome Zac.

Thank you.

So my first question, maybe following up on Jeff's point there on -- maybe just the investment that you're making in Industrial, Mike. I'm just wondering how much of it is playing catch-up versus really investing for future growth? And then, how do you balance that with the idea that we're kind of 7 to 8 years into this economic recovery and could be in this kind of lower growth environment for some time?

Joe, actually, the efficiencies of the product launch, the 40% of the portfolio I told you about, are in the range of 9% to 13% more efficient than anything out in the marketplace. That's how we're going to market around value, around total cost of ownership. And that's why that business is up in the high-teens and bookings are closer to 30%. We know there's no purpose in us playing catch-up to a "me too." So every single thing we've done has been to leapfrog the efficiencies and reliability of what's out there. And if you just look to the Trane portfolio, you would see that. In every launch we've made, not only is it more efficient than anything in the marketplace but it's using refrigerants that go way past the HFC -- the HFC phase out. So we're not meeting anybody kind of where they are. We are leapfrogging. In this whole strategic analytics piece of our business operating system are really figuring out kind of where to go attack, specifically. And then having those strategic growth programs outlined, with the resources, the talent, the investments outlined, and making sure that no matter what we do, we're committing to that, is why you get 80% plus of the growth happening through the areas we're focusing on. And that doesn't come from me-too catch-up.

Got it. That makes sense. How do the investments than maybe -- maybe thinking about it through the lens of Industrial, perhaps you can provide just some color there?

Well, I'm not -- you're asking [ph] what are the investments are, specifically in the Industrial, Joe?

No -- yes -- no, I guess, just specifically around -- the investments that you're making in Industrial, you had been in like this really just this weaker growth environment, probably expect it to persist for quite some time. I'm just trying to get a sense for whether there's some catch-up to do in the Industrial side? Whether your portfolio is better positioned than your peers? Just any color on the competitive dynamics in the investments that you're making.

Yes, I mean, the investments we're making are obviously in the areas that we're not leading. So any place we're not leading is a right spot for it. So if we're leading in 250 horse to 400 horse in the world, we'll keep that competitive, and we'll make sure that we're not losing that position. But we're attacking in the other areas that we think are going to grow. That's just sort of the general view. And you can understand why I am not going to be more specific than that, because we'd rather book it and have margin improvement versus just talking about it and really signaling where we're going competitively around this stuff. That's not been our style at all. But I will tell you that it starts with the strategic analytics being right and the investments being very specific. And the product growth teams -- so engineering, operations and product management, agreeing and working toward the 1 or 2 most critically important things to grow share and margin in a very specific product line or service line has been the formula for us that's been successful. We're going to continue to do that.

And so the other thing that I would add, Mike, just as a practical matter, Joe, for what you're talking about is the investments that are ongoing in Industrial are going to be in the same general areas as you would expect. They're going to be in new products. They're going to be in Operational Excellence, so improving our operating results. And they also include some channel investments, particularly in the compression technologies business. So all the areas you might expect.

Got you. That makes sense. And just one real quick one for you, Sue. On just the price cost breakdown this quarter, how much did material deflation versus price contribute?

So it was -- so let me take you back to Q1 where it was about 50-50 price and direct material deflation. In the second quarter, it was a little more direct material deflation, but really kind of a 60-40 kind of look with deflation and price. And we were priced positive in both segments. And so if you remember when we gave guidance and talked about the second quarter, we had originally called that at 110 basis points, and it came in at 120. So again, it performed exactly as we expected it to in the quarter. And I'll repeat the Q1 comment, we didn't have breakage. So it was a good result.

Yes, Joe, I actually want to take you back to the Industrial question for a second. I just had one more comment here. I made a comment about the strength of the management team, which ultimately I think is what really investors need to believe in and buy. And I look at our Industrial segment management team, and I can tell you that the top 5 to 10 executives running that part of the business co-architected the entire business operating system with me since it began. I couldn't have higher confidence in our ability to win as the markets recover. So I want to make sure that, that point is really clear. It's a very strong management team paying attention to the detail in the business.

Our next question comes from the line of Steven Winoker with Bernstein.

It looks like you're certainly taking profitable share gain on the Climate side, but what's going on in VRF there? And then, on the Industrial side, Atlas Copco Compressor Technique orders were up 1% in the quarter. I know they've got a different mix. I know they've got vacuum and also a slightly smaller North American presence. Maybe is that -- would that explain it all? Or is there something else going on as well that we should be aware of?

Yes, look, in no particular order, Steve, yes, if you look at Atlas Copco's business, they're going to be strong in oil-free rotary and certainly in a smaller range than our large centrifugal machines. We've got great oil-free product and are growing that business, too. But obviously, that's the bulk of what you see with Atlas Copco's business. Vacuum and blowers, you called out, and that's actually still been a market growing. Yes, when you think about oil-free or vacuum and blowers, you have to think about the industries that they go into. And those industries happen into be growing as well, as opposed to some of the heavier industries that would use some of the larger centrifugal machines for the most part. So we do a very thorough compare with all public information that we can pick up from all of our various competitors, not just a single competitor. Have a good understanding of sort of how that mix looks, and then we are realists about where the opportunity is for us to self-help where we can. Right now the self-help comes into growing the service businesses, and they are doing a great job with that. It also comes in to refreshing and developing the portfolio in sort of a small range -- smaller range machines. And that's where we're going to play, going forward.

Okay. And on the VRF side?

VRF, we're -- very well. That's growing faster than the underlying unitary business. We continue to have a very high share. No slow down there from us at all.

Okay. And then just following up on your earlier question -- or comments around the balance sheet and whatnot. But I guess, Mike, in the past you've talked about there being kind of opportunity for consolidation within the overall HVAC market. Do you still -- how are you thinking about that, given the dynamics of the industry going forward? Do you think there's still room in that?

I do. I think there are big moves. And I think that -- yes, you look at what we did with acquiring Cameron's compressor business. And we had synergies in the first year of 15%, and we'll drive it higher this year. So look, I think great synergies exist. And I think that these opportunities are happening, but I think they're bigger and more complex deals.

Our next question comes from the line of Steve Tusa with JPMorgan.

So I mean, what exactly is going on here in Industrial. I mean this just seems like relative to where you were it was viewed as kind of a high-quality business with pretty solid margins. And it just seems like every single quarter, we're just getting deeper and deeper into a hole here. I guess you mentioned the end markets, I mean how much -- just remind us, including Cameron, how much is oil and gas? And then, how much would be in and around oil and gas? And maybe we're just kind of mislabeling some of the end markets, perhaps? And you guys, like everybody else, do you have more exposure there than we would have thought initially?

Yes, Steve, I'll save the oil and gas math for somebody at the end here. But if you look at the biggest market we're in on big machines. And I used 250- to 400-horsepowers as being a big machine down 20%. Actually, as you go up between 250 and 400 and past 400, those growth rates start to look like minus 50%, okay, from where they were. These are the most capital-intensive sort of factories we have. And that certainly, when we have those kinds of volume drops, really adversely affects our mix. So you look at volume alone contributing 3 points of negativity on the bridge, you can see what volume does. And as a proof point, again, go back and look at '09 through '11, look what happened when volume came in, after we had been effectively restructuring the footprint there, and that's where that 7 points came from. So we're heavily leveraged toward that any way you slice it, and that's the main reason for it. Now on the oil and gas side?

Yes, so oil and gas is really going to be sort of a low single-digit percentage, Steve. I mean, that's not -- that's part of the issue because you don't have large projects, but it's really the derivative. So all the other projects just aren't happening, and so it sort of gets labeled with oil and gas. And so let me step back and also add to what Mike was talking about. When I started talking about Industrial early in 2016, and I was sort of breaking it down into pieces for you. What I said was that Club Car was about 20% of the business, and it was going to be up sort of low to mid-single digits, that the aftermarket was about 30% of the Industrial segment, and then it was going to be up low single digits. Then I talked about the big machines being down in excess of 20%, and some of the small rotary and small air being up slightly for the year. And then some of the other businesses like the Material Handling business and the tools businesses being down sort of mid-single digits for the year. If I take that and transform that now into what we're seeing in 2016 after 2 quarters: Club Car, the same spot. They're growing in the mid-single-digits range and that's on track. The aftermarket piece of Industrial is continuing to grow. So you've got sort of solid footing with about 50% of the business. However, when you get over into the other side where I talked about -- if I talked about large machines being down 20%, as Mike said, they're now down 50%, so they are down way larger than what we thought. And even some of the smaller equipment is really much more pressured than I thought it was going to be. And instead of being up sort of low single digits, it's going to be down. So you really just have a lot of dynamics that are going on there with the Industrial business. And to bring it back and wrap it around your question about oil and gas and projects, again, it's really the derivative effects for us in most of our industrial businesses where the large projects just aren't happening and the ones that are happening are much more competitive.

Yes, it's a bit of a Yogi Berra euphemism. But the business will turn when our customers start spending money on these larger plants. And so that needs to happen.

Yes, I just don't know of anything like in my sector. I mean, I'm not blaming you guys at all. I mean, it is what it is. But just outside of -- if you said, "Hey, it's down 50%," we can look at oil and gas CapEx and that's like, "Oh, that's obvious." I mean, in fact, in the market, right now, everybody is getting credit for a 50% increase in oil and gas-related spending next year in some instances. So I'm just -- I don't know what in the economy, other than oil and gas, is seeing 50% year-on-year declines. Even things like big gas turbines out there, big ticket items are seeing -- are certainly not seeing 50%, maybe 20% declines, not 50% declines. So that's kind of a source of my question, you know what I mean?

Yes, there's a spot between sort of small plants and energy production that is a large plant. Steel would be a great example of that. Marine, these are heavy industries that use large machines for air, and that's really kind of where we're suffering on that.

Yes, that makes a ton of sense then. If it's that derivative type of stuff, that makes a ton of sense. One last question, Middle East you said was down. How much was the Middle East down in Commercial HVAC in the quarter?

It was down about 14%.

Yes. And Steve, I'm going to add one point. Material Handling, if you go back and bridge over a multiyear period, it was 2, 2.5 points of Op margin that went away as that business went down 90% or so for us, okay? So you don't want to look at Industrial and kind of hang it all back on a comparison to Atlas Copco on compressors. You want to make sure you understand there's a couple of points of margin there, about a point in tools. Currency is a hit and then you got the volume impact that we talked about on the bridge.

Our next question comes from the line of Andrew Obin with Bank of America Merrill Lynch.

I guess I won't belabor the Industrial business. On transportation, could you just talk as to what you saw in the quarter that your view has changed? Because before you were sort of saying how the North American truck cycle was decoupled from the refurb [ph] market? And it seems like you've changed your view?

Andrew, the subtlety is moving inside that, but the view has always been you're going to see a pullback with American trailer as much as 15% and flat TK. And the mix is changing slightly within that, but it's really what's happening for the full year.

And can we talk about cadence of transportation weakening into the second half, third quarter versus fourth quarter declining, any preliminary thoughts on 2017?

Q3 will look weak because the compare was so strong last year that -- it's the highest of high compares for us there and then moderates a little bit in terms of the comparisons for the fourth quarter. But again, you take the first half of the year and balance it out to flat with no change, and marine container being weak, and really all the change coming with North American truck and trailer, and a little bit coming, obviously, from APUs with just Class 8 sleeper production being down.

And as we've reached the time allotted for our call, our final question will come from the line of Andrew Kaplowitz with Citigroup.

So Mike, just you changed your guidance in Climate from 4% to 6%, to 4% to 5%, but just following up on Andrew's question, is the difference really APUs? Or is it marine? Or is it Middle East? Or is it a combination of the 3?

Middle East is much weaker than we anticipated at the beginning of the year. And as you could imagine, it's a large HVAC business. And so the drag on the Middle East was fairly material. We're seeing some growth in China. That growth was really around shipping product that was booked, but we really haven't seen the pickup in China per se. If you look at China nonresidential construction, it's still a negative, but for the past 6 or 7 months, it's been trending up. I think it's gone from negative 17% up to negative 2%, but it hasn't crossed over. We really would have thought at this point, we would've seen more pick up. The nice thing in China, buildings are built in about half the speed that we see in other parts of the world, and our cycle times for delivery can be half of what they are in other parts of the world as well. So if we did see a China recovery on the HVAC side, you need to see that, say, within a 6-month period, not a 12-month period. But as you get into July and you're not really seeing the bookings here, it's just a way of really derisking the forecast. And really, that derisking is a theme coming into the industrial portfolio too. At this point, if we haven't seen bookings on large machines or bookings on midsize, even rotary machines at this point in time, the reality is you just call it lower, and it's what we've done. And so we hope we've got to the bottom of this thing.

Mike, that's helpful. And if you look at European transport refrigeration in general and FRIGOBLOCK in particular, it seems like it's hung in there quite well. I'm sure -- have you seen any changes post the Brexit announcement? What's the outlook for that particular business?

We haven't had a lot of change relative to Brexit. I think like a lot of companies there's a lot of discussion going on, but not a lot of change. And our business really -- U.K. business is not that big in general. It's more the knock-on effect about what might happen in the region with GDP being shaved in general. But the business has continued to develop well. It's holding in there. We don't see things turning there as a result of Brexit or other market factors here, at least over the next couple of quarters.

And that does conclude our Q&A portion of the call. I'd like to turn the call back over to Zac Nagle for any closing remarks.

I'd like to thank everyone for joining today's call. We truly appreciate your participation. And I look forward to meeting all of you in the future and reconnecting with many of you that I've worked with before. Thank you very much, and we'll be in touch soon.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.